Subprime Woes Spread, Could Last Two Years

Reuters

Tuesday, 27 Mar 2007 | 3:04 PM ETReuters

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A senior U.S. Federal Reserve staff member warned on Tuesday that subprime mortgage market troubles could last as long as two years, while a leading home builder posting a huge profit plunge blamed subprime lending problems for worsening a soft housing sector.

Further underscoring the troubles in the U.S. housing sector, economic data showed home prices fell at the start of this year while consumer confidence waned in March, at least partly due to worries about real estate.

Sandra Braunstein, director of the Fed's division of consumer and community affairs, said problems with subprime mortgages, which are held by less credit-worthy borrowers, could persist for some time.

"Although there are some indications that the market is correcting itself, we remain concerned that over the next one to two years, existing subprime borrowers ... may face more difficulty," Braunstein told a House of Representatives subcommittee in a hearing.

Borrowers with already weakened credit are likely to be slammed further when their adjustable-rate mortgages reset to higher payments.

Delinquency and foreclosure rates will mount, Braunstein said in remarks prepared for a financial institutions subcommittee hearing. The Fed is reviewing its regulation on mortgage cost disclosures, she said.

The head of the Federal Deposit Insurance Corp., a major bank regulator, and lawmakers on Tuesday also called for a national standard to crack down on predatory lending, which is seen as a primary cause of the subprime mortgage crisis.

Democrats in Congress are holding several hearings on predatory lending, the subprime mortgage crisis and its impact on the secondary mortgage market before unveiling legislation to deal with the matter. The House subcommittee hearing is the first of these.

Home Builders Hurting

Economists say tighter lending standards could choke off the ability of borrowers with compromised credit to take out new home loans, and thus dampen the broader economy.

Home builders already are feeling the pinch from the subprime problems. Lennar, the No. 3 U.S. home builder, on Tuesday reported a 73.4% profit plunge for the quarter ended Feb. 28, saying widening problems in the subprime sector stifled an already soft housing market.

The company's shares were recently trading lower. Lennar refrained from issuing new financial forecasts for the rest of the year due to market conditions.

The subprime meltdown is being worsened by a lack of home price appreciation -- and in some cases home price declines. The annual double-digit home price surges seen earlier this decade could have helped borrowers bail out of homes that had grown too costly once interest rates reset higher. Recent signs point to sliding home prices in more regions, however.

U.S. single-family home prices fell in January, the first annual decline in over a decade, according to the Standard & Poor's/Case Shiller home price index for 10 metropolitan areas.

"Seven-month highs in gasoline prices, stock market volatility and the ongoing subprime debacle were the likely factors behind the weaker reading," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida.

Upheaval in subprime mortgages will hurt ratings on collateralized debt obligations, or CDOs, and may bleed into lower-quality auto loans, according to credit rating agency Standard & Poor's.